4. Literature review
4.3. Results from previous empirical studies
Despite of the misconception about divestitures as the mirror-image of asset acquisitions, one of the first pioneering empirical findings of wealth effects in connection to corporate divestments was Bou-dreaux (1975). In a study of 138 voluntary and 31 involuntary divestitures, BouBou-dreaux identified “(...) an unusually positive price movement in a firm's common stock” over a period of three months before to one month after the announcement. The sample did not distinguish between sells-offs and spin-offs, nor did it contain test in significance of the stock returns. Subsequently, empirical research has contributed to the knowledge of corporate divestments effects on shareholder wealth. Even though it is relevant for executives to understand how different divestment types affect shareholder value, most of the existing empirical research has investigated sell-offs and spin-offs in isolated settings.
Only a few empirical studies include both sell-offs and spin-offs. This section provides an overview of shareholder wealth effects identified in the existing literature.
4.3.1. Short-term stock return
Announcement of divestitures comprise significant new information to the financial markets (Hearth
& Zaima, 1984). As discussed in Section 3.1, potential value creation should be observable in the daily stock returns around the announcement. If managers are assumed to act in the shareholders best interests, the announcement effect of a voluntary and appropriate divestment should not be negative (Hearth & Zaima, 1984, and Miles & Rosenfeld, 1983).
Sell-offs
One of the first peer-reviewed articles to examine the effect of a firm’s voluntary sell-off announce-ment on shareholder wealth was Alexander, et al. (1984) analysing a sample of 53 US sell-offs from 1964-1973. The researchers used the Mean Adjusted Returns model and found a Cumulative Aver-age Abnormal Return (CAAR) of 0.17% in the announcement period, which was not statistically sig-nificant. However, by using the Market Adjusted Returns model on the same data sample, the re-searchers found an abnormal return of 0.40% statically significant at the 10% significance level.
In the same year, a study was published by Hearth and Zaima (1984) investigating a sample of 58 sell-offs from 1979-1981. By using the Market Model for each firm, the researchers demonstrated a CAAR of 3.6% in a ten-day period surrounding the sell-off announcement. In addition, the research-ers provided evidence that the financial position of the seller and the size of the divestiture positively affected the abnormal returns.
In the following years, several studies on the wealth effects from corporate sell-off announcements have been published primarily focusing on US data samples. Hite, et al. (1987) present their findings as evidence for asset sales to be associated with the movement of resources to higher valued uses rather than market mispricing before the divestiture announcements. Contrary, Lang, et al. (1995) find that stock-price reactions to sell-offs are strongly related to the use of the proceeds whereas John and Ofek (1995) find greater stock returns for focus-increasing divestitures. Table 3 summa-rizes empirical findings of the existence literature indicating a statistically significant CAAR between 0.4% and 1.66% on the parent firm in the period the around sell-off announcement.
Table 3: Overview of previous studies on wealth effects of corporate sell-off announcements
As evident from Table 3, the majority of the existing literature is based on US data samples while limited European studies have been completed. Afshar, et al. (1992) were some of the first to inves-tigate the shareholder wealth effects of UK sell-off announcement demonstrating a CAAR of 0.85%.
Authors Year Region Sample period Sample Estimation period Event window CAAR %
Alexander, Benson, & Kampmeyer 1984 USA 1964-1973 53 [-150, -31] [-1, 0] 0.40*
Hearth & Zaima 1984 USA 1979-1981 58 [-200, - 101] [-5, 5] 3.55***
Jain 1985 USA 1976-1978 1062 [-480, 361] -1 0.40***
Klein 1986 USA 1970-1979 215 [-100, -51] [-2, 0] 1.12***
Hite, Owers, & Rogers 1987 USA 1963-1981 55 [-400, -201] [-1,0] 1.66***
Hirschey, Slovin, & Zaima 1990 USA 1975-1982 75 [-240, -121] [-1, 0] 1.47***
Sicherman & Pettway 1992 USA 1980-1987 278 [-280, -31] [-1, 0] 0.92***
Afshar, Taffler, & Sudarsanam 1992 UK 1985-1986 178 [-180, -41] [-1, 0] 0.85***
John & Ofek 1995 USA 1986-1988 258 [260, -6] [-2, 0] 1.50***
Lang, Poulsen, & Stulz 1995 USA 1984-1989 93 [-250, -50] [-1, 0] 1.41***
Kaiser & Stouraitis 1995 UK 1984-1987 76 n.a. [-1, 0] 1.33***
Lasfer, Sudarsanam, & Taffler 1996 UK 1985-1986 142 [-200, -11] [-1, 0] 0.82***
Hanson & Song 2000 USA 1981-1995 326 [-300, -60] [-1, 1] 0.60**
Kaiser & Stouraitis 2001 UK 1984-1994 590 [-300, -61] [-1, 0] 1.20***
Bates 2005 USA 1990-1998 372 [-250, -51] [-1, 1] 1.20***
Overview of previous studies on wealth effects of corporate sell-off announcements
The table shows abnormal cumulative annual return (ACAR) of spin-off announcements in existing literature. The level of significance is illustrated with asterisks; * for 10% significance, ** for 5% significance and *** for 1% significance.
Likewise, Kaiser and Stouraitis (1995) demonstrated a significant CAAR of 1.33% based on 76 UK sell-offs. Subsequently, Kaiser and Stouraitis performed the same analysis on sell-off samples from Sweden, Germany, and France, where only abnormal stock returns of sell-off announcements in Sweden proved to be statistically significant. The effects of sell-off announcement in Germany and France were positive but statistically insignificant.
Spin-offs
Several previous studies on announcement effects of spin-offs document significant positive CAARs.
Using different samples of public spin-off announcements, previous peer-reviewed literature indi-cates an abnormal stock return between 1.32% and 5.4%. The first researchers to present empirical findings on abnormal stock returns were Miles and Rosenfeld (1983). Based on a sample of 55 vol-untary spin-offs from 1963-1980, using The Mean Adjusted Return Model, the authors demonstrated a CAAR of 3.34% in a two-day event window around the announcement date. Using the same meth-odology, similar announcements effects were confirmed by Shipper and Smith (1983) and Hite and Owers (1983) on samples of 93 and 123 voluntary spin-off announcements from 1963-1981. After-wards, several studies investigating different aspects of spin-off transactions in US have confirmed similar CAARs on samples from different time periods. Krishnaswami and Subramaniam (1999) find that pre-divestment level of information asymmetry and relative size of the divested subsidiary is positively correlated to abnormal returns, whereas Daley, et al. (1997) and Desai and Jain (1999) find higher abnormal returns for industry focus increasing spin-offs.
Table 4: Overview of previous studies on wealth effects of corporate spin-off announcements
The existing research of announcement effects related to offs has primarily focused on US spin-off transactions. According to Kirchmaier (2003), the limited research on European spin-spin-offs is
Authors Year Region Sample period Sample Estimation period Event window ACAR %
Miles and Rosenfeld 1983 USA 1962-1980 55 [-240, -121] [0, 1] 3.34***
Schipper and Smith 1983 USA 1963-1981 93 [-280, -161] [-1, 0] 2.84***
Hite and Owers 1983 USA 1963-1981 123 [-200, -51] [-1, 0] 3.30***
Linn and Rozeff 1985 USA 1963-1982 53 [-200, -91] [-1, 0] 2.80***
Copeland, Lemgruber, and Mayer 1987 USA 1962-1982 188 n.a. [-1, 0] 3.00***
Vijh 1994 USA 1964-1990 113 [-610, -360] [-1, 0] 2.90***
Slovin, Sushka, and Ferraro 1995 USA 1980-1991 37 [-240, -121] [0, 1] 1.32***
Allen et al. 1995 USA 1962-1991 94 [-160, -61] [-1, 0] 2.15***
Seward and Walsch 1996 USA 1972-1987 78 [-200, -51] [-1, 0] 2.60***
Johnson, Klein, and Thibodeaux 1996 USA 1975-1988 104 [-170, -20] [-1, 0] 3.96***
Daley, Mehrotra, and Sivakumar 1997 USA 1975-1994 85 n.a. [-1, 0] 3.40***
Krishnaswami and Subramaniam 1999 USA 1979-1993 118 [-200, -45] [-1, 1] 3.28***
Desai and Jain 1999 USA 1975-1991 155 n.a. [-1, 1] 3.84***
Maxwell & Rao 2003 USA 1974-1997 80 [-285, -31] [0, 1] 3.59***
Kirchmaier 2003 Europe 1989-1999 48 400 days [-1,1] 5.40***
Veld and Veld-Merkoulova 2004 Europe 1987-2000 156 [-220, -21] [-1,1] 2.62***
Sudarsanam & Qian 2007 Europe 1987-2005 170 [-220, -21] [-1,1] 4.82***
Veld and Veld-Merkoulova 2008 USA 1995-2002 91 [-220, -21] [-1,1] 3.07***
Rüdisüli 2005 USA &
Europe 1990-2003 772 [-246, -31] [-1,1] 2.80***
Overview of previous studies on wealth effects of corporate spin-off announcements
The table shows abnormal cumulative annual return (ACAR) of spin-off announcements in existing literature. The level of significance is illustrated with asterisks; * for 10% significance, ** for 5% significance and *** for 1% significance.
caused by the lower frequency of demergers in Europe compared to the US. However, the increasing number of US studies documenting positive returns may have affected the number of European offs (Veld & Veld-Merkoulova, 2004). In the period from 1995 – 2000 more than 170 European spin-offs were completed compared to only 62 spin-spin-offs from 1987-1994. The first studies of European spin-offs conducted by Kirchmaier (2003), Veld and Veld-Merkoulova (2004), and Sudarsanam and Qian (2007) showed similar results as US studies, indicating CAARs between 2.62% and 5.40%
upon announcement. Veld and Veld-Merkoulova (2004) find significant larger returns for firms in-creasing their industrial focus, whereas Sudarsanam and Qian (2007) found corporate focus and glamour stocks to positively affect the announcement returns.
Spin-off versus sell-off
The first empirical evidence regarding the impact of both spin-offs and sell-offs on shareholder value was Rosenfeld (1984). Based on a sample of 35 spin-offs and 62 sell-offs from 1969-1981 and using the Mean Adjusted Return Model, Rosenfeld (1984) demonstrates CAARs of 5.56% for spin-offs and 2.33% for sell-spin-offs in the [-1,0] event window. The difference in return of the two types of divestitures was found to be significant at a 1% level. Thereby, the research concluded that returns of spin-offs outperform sell-offs. The article acknowledges that a spin-off strategy is not necessarily superior in terms of shareholder value creation as a sell-off provide liquidity resources into the firm.
However, the article found similar results when accounting for the financial strength of sell-off and spin-off parents at announcement, hence unchanged conclusion (Rosenfeld, 1984). In accord-ance, Mulherin and Boone (2000) demonstrated a CAAR in the [-1,1] event period on 4.51% for 106 US spin-offs and 2.60% for 139 US sell-offs. However, the study did not test whether the difference in returns of the two types of divestments was statistically significant. In a comprehensive study, Pre-zas and Simonyan (2015) investigate and compare the announcement effects of 3989 US sell-offs and 357 spin-offs announced from 1980-2011. The CAAR of spin-offs in the [0,1] event window was 3.73% compared to 1.12% for sell-offs. The difference between the two types of divestitures was significant at the 1% level demonstrating that spin-offs have significantly larger announcement ef-fects than sell-offs.
4.3.2. Long-term stock return
The positive abnormal stock returns around announcement of both sell-offs and spin-offs described above indicate that investors expect divestitures to create value. Assuming semi-strong EMH, the total effects of investors’ new expectations to firm value should be reflected in the share price of the parent shortly after the announcement. Therefore, announcement of divestments should not be as-sociated with any long-term abnormal stock return. However, the capital markets are not always as rational and efficient as theoretically prescribed. Specifically, investors might not be able to estimate the total value of a divestment upon announcement due to common cognitive biases, such as
con-servatism, representative heuristic, and overconfidence (Qian, 2006). In addition, Porter (1997) ar-gues that short-term stock market reactions are highly imperfect measures of the value created through changes in corporate strategy. In the section below, previous empirical findings on long-term stock returns will be presented.
Sell-offs
Unlike M&A, the long-run performance of sell-offs has been far less documented (Lee & Lin, 2008). As one of few studies on shareholder wealth effects, Bates (2005) investigates long-term stock returns of the parent firm. According to Bates, the effects of a sell-off are only partially incor-porated into security prices around the sale announcement date since investors are often not fully aware of how the management intends to use the proceeds. Based on a sample of US sell-off trans-actions, Bates documents positive abnormal returns up to two years after the announcement among firms retaining the funds for future investment opportunities. Thereby, the results of Bates indicate that investors only partially incorporate the total benefits of divestments at announcement. Further-more, the findings of Bates contradict theories of agency conflicts and free cash flow consumption since only firms retaining the proceeds following the sell-off yield returns significantly different form zero.
Lee and Lin (2008) argue that the initial market reaction to sell-off announcements may not fully reveal their long-run shareholder wealth implications due to an increased degree of information asymmetry during periods of corporate restructuring and increased uncertainty about firms’ future performance. Based on a sample of 655 UK sell-offs, Lee and Lin (2008) observe significantly neg-ative CAAR (benchmarked against the Fama French Three-Factor Model) over all the examined horizons, e.g. −7.1% over 12 months and −37.9% over 60 months. The results imply that UK sell-offs are systematically associated with reductions in shareholder wealth in the long-run. Thereby, the article contradicted the common perception of corporate sell-offs as value creating.
Spin-offs
Several peer-reviewed articles have demonstrated abnormal stock returns following a corporate spin-off with a few being statistically significant. Due to the characteristics of spin-offs, the existing shareholders benefit from stock returns in both the parent and the subsidiary. The total return is commonly estimated by constructing a proforma firm. The results of the most relevant studies are presented in Table 5.
Cusatis, et al. (1993) were some of the researchers to investigate the long-term effect on a sample of US spin-offs from 1965-1988 documenting abnormal returns of both the parent and the subsidiary in up to three years beyond the spinoff announcement date. Using the buy-and-hold and matching firm adjustment methodologies, Cusatis, et al. (1993) demonstrate a two-year abnormal return of
18.9% on the proforma combined firm, 26.7% on the parent firm and 25.0% on the spun-off firm. The abnormal returns were attributed to market underreactions of the enhanced probability for both par-ent and subsidiary to become M&A targets involving recipipar-ents of premiums.
Other articles including Desai and Jain (1999) and McConnell and Ovtchinnikov (2004) have con-firmed long-term abnormal stock returns for US spin-offs. Particularly, abnormal returns of the sub-sidiary have showed to be rather robust across studies. However, later researchers have not been able to demonstrate the same statistically significance of abnormal returns on parent firms. Accord-ing to McConnell and Ovtchinnikov (2004), differences in results are explained by unusually high returns for parent firms in specific periods such as the period (1964-1988) analysed by Cusatis, et al. (1993).
Table 5: Overview of previous studies on long-term stock return of corporate spin-offs
Using the same methodologies, empirical research on European spin-off transactions has not been able to demonstrate the same positive long-term abnormal stock return, and the results are much more scattered. Kirchmaier (2003) demonstrates statistically significant abnormal two-year return of the subsidiary on 17.3%. The researcher found an insignificant negative two-year return of the parent on -5.9% indicating a negative economic impact on shareholder value. The results of Veld and
Veld-Authors Year Region Sample period Sample
1 year 2 years 3 years
Cusatis, Miles, and Woolridge 1993 USA 1965-1988 141 4.7 18.9** 13.9
Desai and Jain 1998 USA 1975-1991 155 7.7 12.7 19.8***
Kirchmaier 2003 Europe 1987-2000 34 - 4.2
-Veld and -Veld-Merkoulova 2004 Europe 1987-2000 45-61 -2.3 4.2 2
Sudarsanam and Qian 2007 Europe 1987-2005 129 -2.3 8.3 8.4
Cusatis, Miles, and Woolridge 1993 USA 1965-1988 131 12.5** 26.7** 18.1
Desai and Jain 1998 USA 1975-1991 155 6.5 10.6 15.2
McConnell, Ozbilgin, & Wahal 2001 USA 1989-1995 80 13.5 19.2 5.1
Powers 2001 USA 1989-1998 187 2.5 -
-Kirchmaier 2003 Europe 1987-2000 34 - -5.9
-McConnell & Ovtchinnikov 2004 USA 1987-2000 267 5.9 4.6 2.2
Veld and Veld-Merkoulova 2004 Europe 1987-2000 68-106 -0.65 6.5 -0.4
Rüdisüli 2005 World 1990-2003 258-435 7.7 17.3 15.9
Sudarsanam and Qian 2007 Europe 1987-2005 129 -3.9 6.2 7.1
Cusatis, Miles, and Woolridge 1993 USA 1965-1988 146 4.5 25.0** 33.6**
Desai and Jain 1998 USA 1975-1991 162 15.7*** 36.2*** 32.3***
McConnell, Ozbilgin, & Wahal 2001 USA 1989-1995 96 7.2 5.8 -20.9
Powers 2001 Europe 1989-1998 187 6.3 -
-Kirchmaier 2003 Europe 1987-2000 41 - 17.3*
-McConnell & Ovtchinnikov 2004 USA 1987-2000 311 10.6** 8.2 2.9**
Veld and VeldMerkoulova 2004 Europe 1987-2000 53-70 12.6 13.7 15.2
Rüdisüli 2005 World 1990-2003 229-336 18.9** 30.9*** 55.8**
Sudarsanam and Qian 2007 Europe 1987-2005 142 7.2 17.5 23
Overview of previous studies on long-term stock return of corporate spin-offs
The table shows the buy-and-hold abnormal return (BHAR) in the period up to three yearsh following the announcement of spin-offs demonstrated in existing literature. The level of significance is illustrated with asterisks; * for 10% significance, ** for 5% significance and
*** for 1% significance.
Combined Proforma firm
Parent firm
Subsidiary
Event window (BHAR %)
Merkoulova (2004) and Sudarsanam and Qian (2007) are comparable to the studies on US spin-off transactions demonstrating minor positively returns on the parent firm exceeded by higher abnormal returns on the subsidiary firm following the spin-off. Neither of the articles provide statistically signif-icant results, but the results indicate a positive impact on shareholder value following a spin-off.
Sell-off versus spin-offs
Prezas and Simonyan (2015) is the only identified existing study on long-term stock returns analys-ing both sell-offs and spin-offs. The holdanalys-ing period returns of divestanalys-ing firms are analysed relative to two benchmarks (the value-weighted CRSP index and the S&P 500 index). After the announcement, firms divesting through sell-offs realize larger one-year, two-year and three-year holding period re-turns compared to firms divesting through spin-offs. The differences in rere-turns are statistically signif-icant at either the 1% or the 5% level. The results indicate that firms divesting through sell-offs per-form significantly better than firms divesting through spin-offs in the post divestiture period. Particu-larly, the realized returns of firms divesting through spin-offs are different from what has been demon-strated in other literature.
In a concluding remark, the validity of the empirical findings regarding long-term stock returns related to corporate divestments presented above have been questioned by proponents of the EMH.9 Thus, analysis of long-term stock returns implies important methodological choices, which will be elabo-rated in Section 6.
4.3.3. Operating performance
Despite the reasonable number of articles providing empirical evidence on abnormal stock returns on short-term and partially on long-term, limited articles have investigated whether the share price reactions are supported by real operating gains.10 However, basic Corporate Finance theory ex-pects a firm’s stock price and operating performance to correlate and converge, particularly on long-term. The characteristics of spin-offs allow for a direct comparison of the pre-spin-off firm and a proforma combined firm including both the retained and divested business unit. The same is not possible for firms engaged in sell-offs. Therefore, we have focused on results regarding the post divestment performance of parent firms. However, results regarding changes in performance of spin-off subsidiaries are also briefly commented.
One of the pioneering articles providing evidence on changes in operating performance following sell-offs is John and Ofek (1995), analysing a sample of 321 sell-offs from 1986-1988 using three
9 Specifically, Fama (1998) and McConnell, et al. (2001) have criticized the study methodology and thus the results ob-tained by Cusatis, et al. (1993) were not adjusting for cross-correlation.
10 The limited number of studies might be explained by the fact that changes in the way a firm does business is much more likely to materialize from a coordinated series of divestitures rather than from a single divestiture (Brauer, 2006;
Berger and Ofek, 1999).
different accounting based profitability ratios. In general, the researchers determine that a sell-off leads to an improvement in the operating performance of the seller’s remaining assets in each of the three years following the asset sale. However, the performance improvements identified are primar-ily concentrated in firms engaged in focus-increasing sell-offs. In addition, John and Ofek demon-strate changes in operating performance to be correlated to the seller’s stock return at the divestiture announcement. Thereby, capital markets incorporate the expectations of increased future cash flows in firm value when the sell-off is announced supporting the EMH. In a more recent study of 74 sell-offs reported by UK firms in the period 1985-1991, Gadad and Thomas (2007) provide em-pirical evidence on improved abnormal operating performance in three years after an asset sale when controlling for industry performance and pre-sale performance of the firm. Similar results are documented by Hillier, et al. (2009) on a sample of 413 sell-offs announced by UK non-financial firms between 1993-2000. The authors identify a significant positive change in industry-ad-justed ROA in the year following an asset sale. Furthermore, the changes are significantly positive in each of the three years for subsamples of firms in poor financial condition indicating poor opera-tional performance and high financial leverage as divestment motives.
The primary articles providing evidence on changes in operating performance following spoffs in-clude Daley, et al. (1997) and Desai and Jain (1999) both examining samples of US transac-tions. Based on a sample of 85 spin-offs in the period 1975-1994, Daley, et al. document significant improvements in operating performance following cross-industry spin-offs whereas no significant changes are found for own-industry spin-offs. In the study, operating performance is measured by return on assets (ROA), and the researchers compare the ROA of the pre-spinoff firm with the ROA of the combined parent and subsidiary in the post-spinoff period. In addition, the results indicate that performance improvements are primarily driven by enhanced performance in parent firms con-sistent with the refocusing and efficiency motives for divestments. Desai and Jain (1999) investigate operating performance of firms analysing operating cash flow returns of 155 spin-offs divided on subsamples of 111 focus-increasing and 44 non-focus-increasing spin-offs. The article demon-strates a significant improvement in the operating performance for the focus-increasing par-ents and their corresponding subsidiaries exhibiting positive operating cash flow returns compared to matching firms. For the non-focus increasing sample, the performance of parent firms is similar to their matching firms while divested subsidiaries significantly underperform their matching firms. This result should be interpreted together with the identified correlation with non-focus-increasing spinoffs to be more likely to include the separation of underperforming subsidiaries. According to Desai and Jain (1999), the management in parent firms have incentives to spin off underperforming businesses if their incentive plans are based on accounting ratios.
The only study identified investigating changes in operating performance of both sell-offs and spin-offs is Prezas and Simonyan (2015), applying three different accounting measures includ-ing 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬
𝑬𝑬𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑻𝑻𝒂𝒂𝒂𝒂𝒂𝒂𝑻𝑻𝒂𝒂, 𝑬𝑬𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑻𝑻𝒂𝒂𝒂𝒂𝒂𝒂𝑻𝑻𝒂𝒂𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬 and 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬
𝑺𝑺𝑻𝑻𝑻𝑻𝒂𝒂𝒂𝒂 . Based on a sample of US spin-offs and sell-offs, the article
pro-vides results indicating that firms divesting through sell-offs unequivocally improves post-divestiture operating performance whereas operating performance of firms divesting through spin-offs mostly deteriorates. On all three accounting-based measures applied, the researchers found that sell-offs are associated with significantly greater changes in post-divestiture operating performance com-pared to spin-offs.
The literature presented above is primarily focused on US or UK samples, whereas no studies on European samples have been found. This may be explained by historical dispersity in accounting standards between European countries challenging such comparison of firm performance. However, the increasing streamlining of accounting standards within the European area enhance comparability of operating performance.